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07/09/2006

The Economics of the Revolving Door--Posner

Articles by Eric Lipton in the June 18 and 19 issues of the New York Times discussed the "revolving door" phenomenon with specific reference to the Department of Homeland Security. According to Lipton, although the Department is only three and a half years old, already more than two-thirds of its senior executives have quit for jobs in the private sector, mostly working for companies that have or seek contracts with the Department, which has an annual budget of some $40 billion. These executives, some of whom had come to the Department from the private sector for brief stints in government sservice, are paid multiples of their government salaries when they leave to join or rejoin the private sector. Although departing government employees are forbidden to lobby their former government employer for a year, the prohibition is particularly porous in the case of the Department of Homeland Security because a former employee is permitted to lobby from the start any unit in the Department for which he did not work. The Department is a conglomerate of 22 formerly separate agencies, with overlapping responsibilities, and there are subunits with each of the agencies.
Should the revolving door be stopped or slowed? Two considerations favor the revolving door. First, people who have served in government have useful information about government's needs and procedures; that information can enable a better matching of government contractors with the agencies that purchase their services. Second, the opportunity for lucrative private employment after a stint of public service reduces the cost to the government of obtaining able employees. The compensation of government employees includes not only their government salaries but also the enhanced private earning capacity that they acquire by their government service.
But these points are persuasive only with regard to career government employees, in the sense of people who worked for the government--initially at least at a junior level--for many years. They accrue valuable knowledge over the course of their employment and the prospect of eventual private-sector employment substantially increases in real terms their meager compensation as government employees. Not that there isn't a loss; many of the ablest and most experienced government employees leave government well before normal retirement age, while the least able stay till or beyond that age because of the difficulty of firing government workers.
The system can also produce transitional crises, as illustrated by the hemorrhaging of government security personnel in the wake of the September 11, 2001, terrorist attacks. The attacks caused a surge in private demand for security personnel, resulting in a sudden and substantial loss of experienced CIA, FBI, and other security officers to the private sector at greatly increased salaries. The increased ratio of private to government salaries represented a windfall for these officers because it had not been anticipated. In the long run, however, these windfalls become anticipations that will enable the government security services to hire abler people because they will foresee superior private-sector opportunities. In other words, as a result of the continuing concern with terrorism, working for government security agencies confers on one more human capital than before 9/11. Meanwhile, however, there is tremendous turnover in government security agencies, and a resulting decline in the quality of those agencies, as senior officers vacate their positions for the private sector and are replaced by inexperienced juniors. The impact on quality is aggravated by the disuptive effect of rapid turnover in any organization.
The exodus of officials of the Department of Homeland Security for the private sector, about which Lipton wrote, is a distinct phenomenon. Many of them are people who had come to work for Tom Ridge in the White House when he was the President's homeland security advisor and went with him to the Department when it was formed in March of 2003 and he became the first head of it. Many did not have extensive or relevant government experience. Moreover, the Department has from the outset been grossly mismanaged. The fault lies mainly in the design and structure of the Department and in the haste with which it was created; but no one considers it, even given these constraints, a well-managed enterprise. The companies that have hired these officials do not care, however, because they are not hiring DHS officials for their managerial expertise. They are hiring them in the hope that it will facilitate the obtaining of contracts with the Department.
The Department needs contracts, of course, and its former officials doubtless have a good sense of how a contractor can make an attractive pitch to the Department; otherwise the contractors would not have hired these officials at high salaries. But whether the officials are actually knowledgeable about the Department's needs is another matter. Many of them were birds of passage, who never became real experts on security. There is warranted suspicion that many of them got their high positions in the Department by reason of political contacts, and those contacts may enable them to land contracts for their new employers that are not in the government's best interest. So the first reason I gave for why "revolving door" practices may serve the public interest is probably absent in the case of senior officials. And likewise the second. The prospect of subsequent reemployment by the private sector probably attracts few able nongovernment people to government jobs. It is disruptive to give up one's private job to work for government for a short time with the aim of then returning to the private sector at a higher level--a level one might well have attained in the ordinary course of promotions and job changes had one remained in the private sector.
Moreover, there is what economists call a "last period" problem that is more serious in the "bird of passage" case than in the case of the career government employee. An individual in the last period of his employment (or a company that is about to go out of business) is not restrained in his self-interested behavior by concern that his employer will fire him (or, in the case of the company, that its customers will desert it). Any government employee who has decided to seek private employment may be tempted to make decisions that will make him more attractive to prospective private employers; the added problem with the "birds of passage" is that their entire government service is last period because they know they are going to return to the private sector soon. All their decisions as government officials may be influenced by a desire to position themselves for as lucrative a reentry into the private sector as possible.
What might be done to alleviate the revolving-door problem? One possibility would be to restructure the civil service so that it paid better and, as important, reached higher in the government system. In the United Kingdom, civil servants occupy the highest posts in government just below the ministerial level. The opportunity to become a permanent undersecretary is an inducement to the ablest civil servants to remain in government service for their entire, or at least a very long, career. In our government quite junior officials, such as assistant secretaries of department and even many deputy assistant secretaries, are appointed from outside the ranks of the civil servants. These are, many of them, the birds of passage; and the diminished promotion opportunities for the civil servants makes a civil service career much less attractive for able and ambitious people than it would otherwise be.
The major exception of course is the military, a branch (realistically) of the civil service in which one can rise to a very high rank, because there is no lateral entry into the uniformed service. The CIA and FBI are other exceptions, since among their top officials ordinarily only the director himself is appointed from outside the agency staff.
Of course there would be costs in strengthening the civil service--one being that the able people it attracts might be more productive in the private sector. But the challenges faced by the American government at present are so acute that we must take steps to improve governmental efficiency, and reform of civil service may be one of them.

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I'd imagine that among the primary reasons people take lower-paying government jobs is idealism. With idealism as a motivator, you should not only have a flow of young people into government jobs, but people who have made money in the private sector returning for a stint of public service. Of course, to enable this, you need to create an environment where employees feel like they're actually doing good, not serving time in a corrupt public/private exchange.

It's also uncommon to see performance-based compensation in the government, while it's common in the private sector. I'm sure this has an impact on job retention, as it's demoralizing to get the same salary for a wide variation of work output.

That said, I'm not sure a lengthy career in government is a good thing. Government should be in service to the rest of society, and not to itself. Remaining in government for a lifelong career would tend to make you favor the interests of government rather than of service.

I don't think revolving door is a problem in itself. Governemnt employees with expertise are as deserving of high paying private sector jobs as anyone else. Homeland security could simply adopt a formal private sector placement office. By managaing out-placements, the issues related to revolving door and conflicts of interest can be mitigated.

While profitability is a good way to judge a business, governments have no direct measurements of productivity. A case can be made to tie compensation to stock price or a revenue goal, but civil service has no equivalent connection. For example, tallying police productivity by counting parking tickets has bad side affects. Maybe someday, a smart economist will come up with a productivity plan for government employees and solve the revolving door predicament.

Rule-making is another layer of economic effect to the government-private sector revolving door that is often overlooked but perhaps even more insidious and harmful to the effectiveness of our agencies and the fairness of their interaction with the market.
It is often the case that some of the high officials contemplating a move to private employment in a related industry (or having already planned one before even entering the civil service) are the same individuals who have some measure of control on setting the rules of the game itself. Making (or keeping) difficult rules creates advantages for government specialists who become rare "masters of the game" and simultaneously frustrates oversight from those who may not have a similarly sophisticated understanding of the process.
There is little motivation to simplify an inefficient, labyrinthian, inconsistent and nonsensical system because it creates a near knowledge monopoly for those that learn the system, which can be an almost impossible education outside government service (and especially when security clearances are involved). Frequently, even bureaucrats who will remain in government service for life, though they often complain bitterly about it early in their careers, will come to value a system's complexity when they discover the advantages derived from a proficiency that can only be learned from many years experience and that makes them practically indispensable.
Knowledge of effective lobbying techniques goes a long way to make these workers valuable to the relevant industries, but manipulating the process of lobbying itself to a high level of complexity while still in service allows an official to create a consultant value for himself and his colleagues that may not exist in a simpler, open, and efficient system.
When an official engages in such tactics he can create a value which is so specialized that his only substantially enriching opportunity is with a single company which itself is essentially obligated to hire this uniquely knowledgeable individual, giving rise to the problems associated with bilateral monopolies.
There are analogies in normal industry where an enterprise both sells, and offers additionally purchasable service, on a product and attempts to monopolize the market for that service through design of the product. In the same way an official can serve a governmental, then private, role in interaction with a department's rules. A company may design an automobile that is purposefully difficult to repair which encourages consumers to purchase an extended service warranty rather than risk repairing the vehicle themselves or paying high mechanic fees arising from the complex design. A computer software vendor may design (or permit through insufficient dilligence) an operating system that is not only vulnerable to viruses, but whose instability undermines the effectiveness of competing security products thereby encouraging customers to subscribe to their own more stable virus protection service.
Some of the rules that are propagated in this manner include a variety of "fine-print waivers" that insiders write and update frequently, and though publically availble, are so buried in a mass of regulation as to become well-known to only a small number of officials. These are especially prevalent in the security agencies where they are often justified by potential requirements for expediency, flexibility, and emergency response. Companies hiring individuals with a rare mastery of the waiver and exemption system can be assured of a way to speed their proposals straight to the top and far ahead of their competitors.
In addition, the political appointee system only serves to exacerbate the situation. Ex-officials whose special knowledge of the system including access to, and personal relationships with, other apointees of the same affiliation have a tremendous incentive to leave service as soon as possible before the swing of the political pendulum precipitates the turnover of many high-level positions and neutralizes the ex-official's value to industry. The new political leadership may purposefully and significantly alter a department's rules and procedures specifically to undermine the fortunes of their political opponents and their effectiveness and value to industry - A "rules patronage" that claws out of even the vastness of government and digs deep into what might otherwise be a politically neutral private company.
I would hope that it isn't naive idealism to expect that industries should focus on the utility, quality, and competitiveness of their products and not on the secrets of the temple learned only through government service by bureaucratic chessmasters.

Revolving door? I have seen enough of it. It just leads to plain old fraud.

"The more competitive and meritocratic a society, the more intractable the problem of poverty. The reason is that in such a society the poor tend to be people who are not productive because they simply do not have the abilities that are in demand by employers."

...or the lack of morals required to be a decent human.

I think some of you are way too educated/insulated to know what is really happening but let me clue you in on my personal situation and observations to have a better glimpse of mundo real (no I am not hispanic).

I see labor being taxed at 16% via SS and the procedes being used for general fund purposes. That means that taxes on investment already has a comparative advantage over labor no matter what the tax bracket. Since SS is a pay as you go system, and the extra is being used for general purposes, anyone earning (this doesn't include earnings from investments)over 90k, the cut off for the sorry ROI from SS has an advantage over those who do not. Advantage for the rich (hey I have those income investments also).

I see top dogs taking more for themselves not because they are worth it, but because they can. They buddy system is alive and well in the boardrooms as all of the recent high press scandals have shown. And by the way, the Kozlowskis, Ebbers, Lay, and others only got caught because their hand cracked the cookie jar when it was pulled out--not because we have a "just" system.

I see corporates wielding unusual power because they have the resources to command it, not because they are worth it. When Exxon paid their former CEO 400 million for retiring, the shareholders were getting nothing in return. It was just a "thankyou" that the good old boys club gave in the self congratulatory bubble of being better because they have the power without the ethics. God smiled down on them here on earth with such privledge. Wait till they see the real cost.

I see economic protections of the law being afforded to those who can buy the best lawyer. The broken cookie jar doesn't count--they are anecdotal anomolies that are proof our system can't catch them unless they break the cookie jar.

There are many, many more beefs I have about the current setup our economic system is developing via our oligarchal and global system but they would take too long to write up.

I have a degree in Economics and wanted to get into my dream industry, agriculture, after successful careers in both real estate and insurance.

I bought a poultry farm and excelled in it rising to the top 10% of growers in two years. Then Tyson Foods tried to pull one over all the farmers with a complex mathematical formula fraud in pay. I found out the fraud and spent the next 2 years trying to get the regulatory agency, the Grain Inspection Packers and Stockyards Administration (GIPSA) to do their job. Senator Tom Harkin was kind enough to take on my issue after I talked with the Republican representatives in my State for help and they seemed more interested in representing their party over their constituents (Bill Frist and Lamar Alexander).

Even though I proved the fraud mathematically, there was no help from GIPSA in curtailing the abuses. Senator Harkin asked for an investigation into GIPSA as I was documenting the abuses in real time. The OIG under Phyllis Fong did the investigation and when the report came out in Dec. 05, the lady who was running GIPSA left office because, no doubt, of the report's total disgrace of her management and her frauds. The USDA did nothing to investigate GIPSA any further and gave JoAnn Waterfield a free walk. They burried the investigations and my allegations.

The mathematical proof I offered and the application of the economic principles of the Packers and Stockyards Act were totally buried in the agency and despite calls for oversight hearings in the Senate Agriculture Committee. My complaints, which would have amounted to a difference in pay to farmers over integrators of around 250 to 400 million dollars a year were buried. No one is held accountable.

As for me and my farm, Tyson has seen to it that I have no more chickens to punish me for bringing up this complaint. I will go bankrupt. In addition, they have put out the word that they will not put chickens in my houses for anyone who wants to buy my houses to further punish me and make my property worthless.

Bill Clinton sold out to Tyson and pardoned Archie Schafer who was bribing the Sec. of Agriculture. George Bush handed over this over to Karl Rove so he could milk this industry for the republicans. Meanwhile economic trash studies funded by the USDA skirted all the concerns farmers raised and avoided answering the hard questions. The "economist" (Tomislav Vukina from NC) who wrote up the report was later rewarded by GIPSA officials Brett Offutt, JoAnn Waterfield, and McBride for his "loyalty" to the predetermined answer they wanted with a flawed from the beginning $420,000 hog study that was to ostensibly compare vertical integration with competitive markets.

The Federal judges in the 11th circuit just threw out two jury verdicts in my industry by ruling from the bench. This ruling saved Tyson Foods an estimated 1.28 billion dollars in estimated economic damages.

Keep pontificating about how rich people deserve their increases in pay while justice is denied in our land.

Marie Antoinette made the same mistake.

(I made the appropriate paragraphs, they didn't come out correctly in the preview)

It is amusing to read free-market theorists write about government, because something deep inside keeps them from admitting that government does anything particularly well, and they certainly cannot fathom that gov't might be more efficient than the private sector. Hence, they perpetuate vast, wrong-headed generalizations about government without taking a hard look at how it compares, pro and con, to the private sector.

Judge Posner makes a good point about the depletion of the civil service. He makes a strong argument that gov't must retain its most talented workers. But he fails to note that many well functioning gov't agencies do just that, by promoting the right people and giving them choice assignments. But gov't agencies corrupted by politics and cronyism do a particularly bad job of either seeking out or retaining talent. The key to improving gov't is to de-politicize agencies and to have strong anti-corruption and anti-nepotism rules. If the workplace values merit above all else, it will attract those who value merit. That has been proven time and again.

The fact is that elite gov't agencies do more for less than their counterparts in the private sector. The military is a prime example, and the federal judiciary would be another one. On the whole, I would say that DOJ and other good gov't law offices (federal, state, and local) also provide such examples. In addition, the private sector is not always so efficient as one would think. Tales of bureaucratic incompetence do not come just from the civil service.

I think what gov't needs, more than anything else, is focus and competence. It needs to realize that it can do jobs just as well (if not better) than the private sector, and more efficiently, if it is run correctly. We don't need Halliburton, for example, when we have the army corps of engineers. We don't need private security contractors, for example, when we have a strong, well-funded FBI or CIA. And we don't need no-bid contracts that are little more than paybacks to political cronies. Run a clean, tight ship, and gov't will function well. Better, I think, than most free-marketeers could ever imagine.

A good deal of your argument rests on the assumption that advancement in both the public and the private sectors depends on ability ‚Äî the same flimsy foundation on which the Peter Principle rests. We do not, necessarily or even usually, rise until the demands of the job exceed our competence. Often enough we keep on rising until we reach a very high altitude indeed, a phenomenon much on display in Washington just now.
reali
I have worked at both the top and the bottom of the federal bureaucracy, and saw competence punished as often as it was rewarded. The same can be said for incompetence. Time and chance happeneth to all men, as we would perhaps underestand more fully if the race weren't being judged in large part by those who have won it.

Difficult though it may be for you to believe, the performance of of private and government firms has been measured and the evidence indicates private firms are indeed more efficient. See, for example, Kole and Mulherin (1997), "The Government as shareholder: a case from the United States," J.LE XL. These results confirm theoretical reasons for expecting lower efficiency from government-owned firms. A number of studies, however, have found government owned firms to be run as efficiently.

Judge Posner is, of course, right: it is not an understatement to say that the survival of our country may very well depend on the competence of the DHS. The solution, however, might be simpler than overhauling the civil service -- particularly because there would be a lag as competent people rose in the ranks, giving us a difficult transition at a critical time. Fortunately, it is also theoretically possible for Americans to elect a chief executive who is genuinely interested well run government, and that person could appoint competent people who were motivated by patriotism rather than self-aggrandizement. True, we might need to reach back to Eisenhower to find such an election where Americans even had the option of voting for such an executive, but it should certainly be a major criterion in future national elections.

As a side note, has anyone done a systematic study on the statistical likelihood of judicial mellowing over time?

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Few people are talented in and enthusiastic at several professions or crafts simultaneously. Few professors of science make good inventors, and few inventors make good science professors. I am not aware of any useful invention (namely one of a practical thing) made directly by Albert Einstein or Thomas Edison having trained other successful inventors. The same can be said about law: I suspect few law professors make good trial lawyers, and few trial lawyers make good law professors. (I say I suspect because I am not quite so familiar with law as with science.) A selected few are talented and motivated to do several things well -- Judge Posner is obviously one of them for having been an excellent law professor, judge, writer and perhaps a successful consultant.

If the above proposition is agreed to, then it seems to me that most of those who switch between government employment and the relevant private sector are opportunitists who are unlikely to make real contributions to one of them (i.e. government or the private company.) In science, I have seen several examples of practioners in the private sector being hired as professors who are unsuccessful at teaching and publishing papers. Most of those who switch do so because they see an opportunity to make some quick money or bypass an advancement hurdle in their previous employ. Government jobs, especially those in a new government agency, are an opportunity to bypass such a hurdle because government jobs are more likely to be offered to those with political connections than the private sector. (FEMA presents a recent example.)

A relevant phenomenon is the temporary appointment of professors of science or engineering in government agencies such as the National Science Foundation or the National Institute of Health. Those who apply for such appointments are usually those who are stuck in their career of teaching and research and who wish to use the temporary government appointment (which gives them access to the assessment of research programs and hence the distribution of government money) as a means to bypass stalled career development. The approach usually successfully allows the temporary government job holder to overcome the career hurdle. The problem with this approach is that the overcoming of the career hurdle is no good reflection of the relevant skills.

Could you help me. This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.
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